Barrons: We’re all to blame

posted at 1:45 pm on February 7, 2009 by Ed Morrissey

Did deregulation during the Bush administration create the housing bubble and the following economic collapse? Not hardly, according to Barrons, the venerable finance periodical, unless one counts Sarbanes-Oxley and a thousand new pages of laws on financial transactions deregulation (h/t: HA reader Nancy B):

CONTRARY TO A VIEW POPULARIZED DURING THE 2008 presidential election season, the current economic crisis was not the result of deregulation.

The Bush administration made many mistakes, but deregulation was not one of them.

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it’s hard to imagine a scope that would be effective.

So what did cause the economic crash of 2008? Hot Air readers already know the answer, but it’s worth repeating:

Today’s problems have their roots in programs and financial instruments that shifted the locus of moral responsibility away from private individuals and institutions to wider circles that were understood to end with a government guarantee. Heads of the top banks and financial institutions could approve substandard home-mortgage underwriting — prone to increased default — because those loans could be securitized by Wall Street and sold off to investors or to government-sponsored enterprises (GSEs), with no likely recourse to the financial institution of origin.

Our present crisis began in the 1970s, during the Carter administration, with passage of the Community Reinvestment Act to stem bank redlining and liberalize lending in order to extend home ownership in lower-income communities. Then in the 1990s, the Department of Housing and Urban Development took a fateful step by getting the GSEs to accept subprime mortgages. With Fannie and Freddie easing credit requirements on loans they would purchase from lenders, banks could greatly increase lending to borrowers unqualified for conventional loans. In the name of extending affordable housing, this broadened the acceptability of risky loans throughout the financial system.

Unfortunately, Scott Powell turns a little too optimistic:

The collapse and government seizure of Fannie and Freddie in September 2008 ended the experiment in partial socialization of the U.S. housing sector.

Has it? The stimulus package passed by the Democrats in the House included billions of dollars to support ACORN and other low-income-housing efforts. Barney Frank and Chris Dodd continue to deny that their “partial socialization” had any role in the collapse, and so far the mainstream media has yet to correct the record. They’re running with the “deregulation” meme that Powell expertly refutes.

Only when Frank, Dodd, and the housing socialists get correctly discredited for their damage will we be able to breathe freely on housing again. I suspect we’ll have to have another collapse before people finally admit the failure of those policies. After all, we’re about to repeat all of the worst aspects of the New Deal and Keynsianism without much pushback. And that, more than any other reason, is why this is everyone’s fault, and will be when it happens again.

Blowback

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Only when Frank, Dodd, and the housing socialists get correctly discredited for their damage will we be able to breathe freely on housing again.

McCain had the opportunity to do this during his campaign, in fact, he promised to name names and hold them accountable. He could have called for hearings and suitable punishment to the culprits. He had the pulpit. He failed to follow through.

Only when Frank, Dodd, and the housing socialists get correctly discredited for their damage will we be able to breathe freely on housing again. I suspect we’ll have to have another collapse before people finally admit the failure of those policies.

Feb. 5 (Bloomberg) — Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.

Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site.

You stole part of what I intended to excerpt, and you penned a wonderful summary of one of McCain’s critical weaknesses.

But I will excerpt this:

I suspect we’ll have to have another collapse before people finally admit the failure of those policies.

Dodd, Frank, and the Dems are in complete denial over their role in enabling the shoddy lending. Regulate the hell out of things at the back end of the secondary markets, but something still will go wrong if, at the front end, lending standards continue to allow loans to people who are only able to rent.

After all, we’re about to repeat all of the worst aspects of the New Deal and Keynsianism without much pushback. And that, more than any other reason, is why this is everyone’s fault, and will be when it happens again.

There is one thing in our favor. The Dem bigwigs are cowardly types. When the opposition forms, when a million people surround the capitol building, they will quite literally wet their pants. That day is coming. They did it in peaceful Iceland. It will happen here too.

Looking at it from a capitalistic view, the housing bubble and speculative prices on housing ( especially in certain areas.) never would have happened without the overly easy credit availability created by these slimes in government in the name of fairness. The majority of the house value increases over the last 10 – 15 years was artificial – not driven up by strictly market forces.
It drives me crazy that nobody on the right was more vocal about the blame when all the demos and MSM was blaming capitalism, when it was the removal of capitalistic safeties (actually proving you could afford the loan, having a down payment, etc.) that was the cause.
This led to the current “credit crisis” which because it still is not allowed by government interference to work itself out , will lead to the Great Depression version 2 – new and improved.
“To err is human, to really foul things up requires a computer government.”

The liberals are busy creating rights left and uh, right. And to that list we can add the “right” to credit. Which means that certain favored institutions and people have the right to credit regardless of their ability to pay.

It’s going to be really funny to watch the housing market completely collapse after Barney and co. get through destroying what is left of the mortgage business with new regulations, especially the bankruptcy bill. No investor in his right mind will buy a mortgage backed security in the future; investors will not want Fannie/Freddie bonds either, and the massive new Treasury borrowing to finance the Porkulus is going to suck up every dollar left out there.

In other words, if you need to buy a house or refinance your mortgage, you had better do it quickly. In about 9 months there will be no money for mortgages, except for hard-money lenders who will charge 15% interest.

When the GSEs got into the subprime market in a big way, one of the unintended consequences was that they drove down the prices on subprime loans. That was great for the borrowers, but when the defaults started the lenders and investors soon found that the rates on those loans were actuarially unsound. And most of them were originated by mortgage brokers, who played lenders off each other to get the highest commissions for themselves and the lowest rates for their customers. The brokers had no monetary interest in whether the borrower could actually pay back the loan, because the broker gets paid at closing for delivering the loan to the lender. So the whole system resulted in massive fraud by the mortgage brokers, and NINJA loans and option-ARM loans being shoveled out the door as “affordability products” that helped people buy houses at hugely inflated prices. It was a system designed to fail and fail spectacularly. It all became something of a Ponzi scheme which depended on house prices going up forever.

The collapse and government seizure of Fannie and Freddie in September 2008 ended the experiment in partial socialization of the U.S. housing sector.

I think this is absolutely correct and may actually be a bit of a understatement. I think the result is that the entire economic system has moved away from partial socialization and continues to do so at a truly alarming rate. We’ll be a full socialization before you know it.

Frank is up to his elbow in the Fannie mae problem as he was sleeping with one of the executives with whom he was charged with providing oversite. Specifically, his relationship with Herb Moses deserves more attention since Herb played a key role in relaxing loan rules to those previously unqualified for mortgages.

Interesting to learn more about when and how Herb got his job within an organization that Frank had a congressional leadership role in monitoring.

Republicans should be slamming these guys. It is a target rich environment.

I think this is absolutely correct and may actually be a bit of a understatement. I think the result is that the entire economic system has moved away from partial socialization and continues to do so at a truly alarming rate. We’ll be a full socialization before you know it.

Stephen Macklin on February 7, 2009 at 2:44 PM

The Democrats, Media have been in cahoots for quite sometime. Bush will get the blame though. Funny how the President has to approve mostly everything, and yet his decisions can be over written from Congress. Guess it is easier to blame Bush though.

It all became something of a Ponzi scheme which depended on house prices going up forever.

But it would have never happened unless at the end of that long chain of transactions there was the belief that the government would step in to back the investments. Without that, none of this would have gotten started because no private investor would want to be left holding the bag.

It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

They should have mentioned that these creeps

Barney franks who never met a fanny he didnt rape..
Pelozi – the evil witch
Todd – bought off by country wide.
shummer – absolute moron
murtha – i wont sell out for a measly 50 grand
kennedy – talk about water boarding
kerry – i slipped and fell down can i get another medal

Raped, screwed, hogtied , lied to and then RIPPED of
Freddy and fannie so bad
not only did both institutions get aids

But it SPREAD WORLD WIDE…
and now everything and every business and bank
is dying..

Just like the real AIDS..

This is what happens when you give all the power to a freaking homosexual idiot who has corrupt friends like pelozi and the rest of the cretings in our hallowed halls
Absolute power..

Oh and the best part

the democraps just gave freddie and fanni another 20 billion to loan out to every illegal mexican

Sheesh i am wondering if americans (meaning real americans should all move to the center of the usa)

and then let all the liberals infest the east and west coasts..

they can live and destroy their part
and we will live and rebuild our part of the nation

Crooks in the Congress, the Senate and especially the two former leaders of Fannie and Freddie. How come they are covered up by the ‘media’?

Schadenfreude on February 7, 2009 at 2:49 PM

I think the question is whether the media’s credibility will completely collapse in the minds of a vast majority before or after they destroy capitalism and traditional American culture. As they control TV and the common culture, the answer to that question will have profound ramifications for you and me. Certainly, it’s not the abilities of dem. pols that have gotten them where they are.

Frank is up to his elbow in the Fannie mae problem as he was sleeping with one of the executives with whom he was charged with providing oversite. Specifically, his relationship with Herb Moses deserves more attention since Herb played a key role in relaxing loan rules to those previously unqualified for mortgages.

Interesting to learn more about when and how Herb got his job within an organization that Frank had a congressional leadership role in monitoring.

Republicans should be slamming these guys. It is a target rich environment.

moxie_neanderthal on February 7, 2009 at 2:46 PM

I know a great deal about that relationship. Moses was promoted well beyond his skill and experience level, and when he and Barney broke up Fannie Mae fired him. There is a huge number of gay people at Fannie Mae. This is not a coincidence.

Nail on the head. I live two-o’clock to Dallas in an area that 10 years back was nowhere but today is just beyond Dallas. The tax base has skyrocketed since 2003. New schools, roads, professional services, and the like have to keep up with the swell of new residents.

A freshly married couple moved in next door to us into a brand spanking new house in December 2003 with two new vehicles and a 106% no-doc builder supplied mortgage. She, being employed as a public school teacher (1st grade) and he as a site manager for a tech firm selling web data services using – don’t laugh – Cold Fusion.

They accounted for every penny in order to upgrade everything in the house and have complete window treatments, Rooms-To-Go furniture and two brand new dirt bikes. (My wife is a cat collector so our window treatments are from LOWES and cost 5 bucks.) Anyway, he crashed on his dirt bike and needed to have his leg pinned in 10 places from his butt to his knee.

He had no medical insurance. She didn’t put him on her medical insurance as it was not in the budget. He lost his job. She moved out (with most of the furniture) while he was out of town on a job interview (looking for someone that could make Cold Fusion work.) He came back and tried to commit an over-medication induced suicide, but a friend interrupted his demise. He abandoned the house and moved in with some new girl somewhere else.

The bank refused to foreclose on the house, but put it on the market as a pre-foreclosure. It sold at a deep discount to a Ma & Pa realty company that had to turn it into a rental. I assure you they are not reporting a profit from the rental income.

There is only my wife and me but we do our best to cancel the votes of all the people I just mentioned.

But it would have never happened unless at the end of that long chain of transactions there was the belief that the government would step in to back the investments. Without that, none of this would have gotten started because no private investor would want to be left holding the bag.

PackerBronco on February 7, 2009 at 2:48 PM

I think the government is backing all of the loans it made under the GSE’s. The credit contraction could be part of a normal recession, except that the biggest banks leveraged up beyond previous historical limits. In 2004, Hank Paulson, then Goldman CEO was one of 5 Wall Street CEO’s asking the SEC to increase leverage limits from 12x to as much as 40x.

With that kind of leverage and awful risk management these guys bought CDO’s and then sold CDS’s against them. The CRA mistakes were nothing compared to the nuclear destruction of the derivative products these guys were dealing in.

$350B in TARP money was injected into the banks not because they made loans to low-income people, but because they couldn’t competently manage the financial risk of their own balance sheets.

There are a lot of bad actors but the Wall Street CEO’s had the most toxic weapons in their hands.

After the various and sundry examples of voter fraud perpetrated by the ACORN thugs last election cycle, why aren’t Republicans in the House and Senate vociferously denouncing and forcefully opposing the avalanche of money being funneled to ACORN in the Porkulus package?

We might as well concede the whole damn show now if we’re not going to staunchly oppose PAYING for this kind of institutional fraud.

This has infuriated me for a long, long time. People just shut down their minds and do not want to be bothered with it. If they close their eyes and ears, it will go away. We all know what the problem is and know the key players. It’s the rest of the folks that do not care or know. This is the anger that John McCain couldn’t bring himself to use in his campaign. Instead we were treated to all sorts of non-stories about Sarah Palin. The world’s financial system was put in jeopardy by the Democrats and now they cannot get it back on track. We all know that this stimulus will fail big time, and saying “I told you so.” isn’t much comfort to me. For the first time in my life, I do not know how to protect myself. I can’t take any action because I don’t know what action to take. We have always survived, but this time is different.
If I were a producer at Fox, I would be taking each one of the perps, starting with Carter, and do five minutes a day for each person affiliated with Freddie Mac and Fannie Mae that perpetuated this catastrophe. I would tell this story as a narrative and it would probably take 10 days. The Fox clip barely scrathes the surface. The people that don’t pay attention can get nothing from that clip. They don’t know the narrative. I’ve learned nothing from newspapers or even Fox. Rush and Hannity have done a good job, but have left this story for other atrocities that we need to know about.
I thought O’Reilly was going to do it, but the first one up was Barney Frank and O’Reilly went off on him and it turned into a shouting match. Didn’t learn much except Frank stuttered so badly that he was incoherent. That told a story in itself, but not everything. Then Frank and Dodd were put in charge of writing the first bailout and that was the end of sanity.

Had this happened in China, is there any doubt that Dodd and Frank would have been executed by now? Hell, theyd’ve backed the execution bus right into the Rotunda!

Kid from Brooklyn on February 7, 2009 at 2:24 PM

Dearest Kid, sadly, China will have its revolution and go free, Capitalism-free. Then, when we’re way over there btw. socialism/communism, they’ll take us over, not by phisically fighting us, because they won’t have to.

Our ‘sophisticated’ elites and media have not figured it out yet.

One thing, they also have not figured out, yet, there is no one a more productive, lucrative and ruthless master than the Chinese are.

$350B in TARP money was injected into the banks not because they made loans to low-income people, but because they couldn’t competently manage the financial risk of their own balance sheets.

There are a lot of bad actors but the Wall Street CEO’s had the most toxic weapons in their hands.

dedalus on February 7, 2009 at 3:25 PM

I don’t disagree with that, but this whole house of cards was built upon something. It had to have a foundation because despite blaming this on greedy capitalists, no in their right mind would loan money to someone who is unlikely to pay it back.

The problem is that those bad loans could be repackaged and sold to the next sucker down the line and then the next and the next. However that line has to end somewhere and it ends with people who believe that they can’t fail because the federal government will back them up. Without that implicit assurance there is no foundation and the chain doesn’t get started.

So one way to think of it is that the government starts the ball rolling with expansion of the CRA and keeps the ball rolling by propping it up on the other end of the chain of transactions.

jcila We had illegal aliens living across the street and selling drugs and threatening the whole neighborhood. A local cop told me to suck up to them when I complained. The cops here don’t want to alienate the Hispanic community. Honest. The sheriff put it in the paper to justify his failure to work with ICE. Anyway, they couldn’t keep up on their payments despite robust dope sales so they trashed the whole place and stole everything that wasn’t bolted down. And a few things that were. They now live on your tax dollars in public housing and are trying to get the government to fix the house. Isn’t that special?

Yes it’s ended PARTIAL socialization of the industry, and began TOTAL socialization of the industry. Not exactly confidence building.
The ONE’s relation has not been booted, I believe she has a hearing on April 1. APRIL FOOL’S DAY.

John McCain couldn’t use it in the campaign because he had a dozen former Fannie and Freddie lobbyists working for his campaign.

Of course, Tom Donilon can get an appointment as Deputy National Security Advisor, and nobody bats an eyelash. Donilon was Fannie’s chief lobbyist when all the dirty stuff went down under Frank Raines.

Did deregulation during the Bush administration create the housing bubble and the following economic collapse?

No, but the Commodity Futures Modernization Act, signed by Clinton on his way out the door in 2000 did. And Republicans are more to blame than Democrats for that steaming turd. The “Enron loophole” took 8 years to close, and greatly contributed to the speculative oil bubble that choked us all. You guys can’t be blind partisans and expect to be taken seriously. The reason swaps are called swaps is semantic bullshit. If they were called what they are, insurance contracts against risky investments, they would have to have been regulated. The fact that common sense investors could see the lunacy of the subprime pools ratings, and could buy third party swaps against the lunacy led to the tens of trillions of dollars out there that have to be paid, losing hedge funds deleveraging, the big boys scrambling to unwind the mess, etc. They sold this crap to your underfunded and desperate pension funds! Get ready for our demographic S to H the F.
It wasn’t just the stupid mortgages that the Dems enabled, and Bush adopted as part of his Ownership Society in ’02, it was Congress allowing Wall St. to treat these go-go mortgages as bets taken by a crooked croupier.

BTW – you folks know how these instruments came into existence, right? MBS’, CDO’s and CDS’ were the products of professional mathematicians using MODELS. That is one of Moody’s excuses for the insane ratings on this garbage (well, that and competition with S&P to see which could kiss Wall Streets butt chapped first).
The same bullshit that brought you CO2 driven global warming has now brought down (somewhat) orderly capitalism. Some great mathematicians, like Mandelbrot, could see through the foolishness of trying to model greed and human behavior.

You can thank the geniuses at Merrill Lynch for most of that. Yet that company was allowed to live and get taken over by Bank of America. About 3/4 of the people who worked at Merrill ought to be on Death Row right now, for first-degree murder of the U.S. economy.

I am missing proof the entire debacle is due to sub prime lending to unqualified home buyers

There was that but I know too many highly qualified home buyers who got sucked into balloon mortagages not because it was cheaper but because they were lied to. In more than one case I know of they were presented with a ‘revised’ explanation of the mortgage they thought was to be fixed at the moment of signing.

There was a ponzi scheme in Michigan home financing where mortgage brokers wrote loans that needed to be re financed every two years to keep the profits flowing to the brokers

The sub prime loans have a 39 precent default but that was not the majority of the housing market.

What I saw in this era was
1. a huge debt snowball caused by 911 recovery and anti terrorist programs
2. revision in banking tules
- that forced homes to be sold during bankrupcies helping to depress home prices
- that allowed huge minimum payments on credit cards and a blitz of penalties including raising interest on current balances to 29 percent for a single late payment
- that allowed gambling on financial papers facilitating the unbelievable hedge fund pyramid schemes
3. A huge trade deficit with China, 2 trillion dollars no longer floating in our banking system but sitting in China. Those dollars could not be circulated into jobs in the US, as the Chinese well knew
4. Illegal alien welfare states like California living on borrowed funds as the productive sector shrunk due to credit card collapse cutting purchases, causing job loss from consumption drop, causing increased burden on the states as tax revenues fell behind spending
5. The shinking job market caused by the end of credit liquidity caused by all of the above
6. the coup de gras (and intentional I believe) was the jacking up of oil prices by the cartels

Sub crime foreclosures were the canary in the coal mine, the first victim of a toxic debt spiral related to